Question 1
Sean’s primary goal for this project is to build an environmentally friendly and financially profitable housing unit. Sean is concerned about environmental issues, and achieving this objective would help him achieve a lifelong goal. He is also interested in showing other investors that green buildings make economic sense. Although many construction projects are ongoing in Missoula, most disregard the environment and contribute to degradation. Sean’s other goal is to learn from the current project. He feels that it will help him build a green retirement home in the future. He can know if he has achieved these goals by tracking the duplex’s rental income, operating expenses, and net operating income. If the duplex generates a higher return than his other non-green projects, Sean will have achieved his primary goal. Additionally, better energy efficiency will mean that he has achieved his goal of environmental conservation. Finally, constructing a green retirement home will suggest that his learning objectives have been met.
Question 2
The project is green due to its focus on sustainability and energy efficiency. The duplex uses eco-friendly construction materials such as green cabinets and floor coverings. Importantly, Sean has sustainable ideas for the exterior, such as planting trees and having green fencing. The greatest uncertainty with the duplex is its ability to recover investment costs. Sean estimates the monthly rent will amount to $1600 for the two units. This return is significantly low compared to the initial investment of $ 300,000. Even so, Sean is not guaranteed that the duplex can fetch this amount due to lower prevailing rental rates. There is also uncertainty about what design would make the project “green.” Sean and Tony have differing views about the layout, adding more unpredictability to the project. Compared to the Lunsford Street duplex, the green project would cost an additional $ 115,000.
Question 3
Sean’s approach to decision-making has strengths and weaknesses. One of his strong points is his focus on the financial aspect of the project; Sean has conducted extensive calculations in terms of costs and expected return on the project. This approach has enabled him to evaluate the duplex’s viability and applicability to the modern real estate market. It has also helped him to calculate the project’s viability and its ability to repay loans. Additionally, Sean’s focus on design and comparison with other green projects has enabled him to understand the best practices he can apply to the project. He is willing to consult Tony and incorporate his suggestions into the duplex. Sean’s major shortcoming is that he does not fully comprehend the benefits of choosing the green initiative. His decision appears sentimental because he cannot outline the expected benefits of the proposed undertaking. He should focus less on the cost element and evaluate the project’s long-term benefits.
Question 4
The decision about which technology to use for walling is a major one for Tony. The available options have tradeoffs that he must consider before making a final choice. Sean could develop a weighted criteria matrix to provide more structure to the decision-making process. This entails identifying the criteria that are important to him. From the case study, initial cost, energy efficiency, maintenance costs, and environmental impact are critical factors for Sean. He should assign a weight to each criterion based on its importance and score each technology against each criterion. The technology with the highest total score would be the best choice for the project. Sean could also involve other stakeholders in the decision-making process (Cathcart et al., 2020). Tony specializes in green projects and is, therefore, well-positioned to offer insights that Sean can use to improve the project.
Question 5
Sean should consider market rates, the features of the duplex, and the cost of green features when determining the rent for the duplex. Market forces are essential in determining the prices of goods and services. Although higher rents will shorten the cost recovery period, they can disincentive potential tenants since they can get other apartments at lower costs. On the other hand, renting at market costs is not viable because the duplex requires a higher investment cost than conventional non-green apartments. As such, Sean should add a premium to current market rates. This will help him balance the investment costs and existing rates. The $800 monthly rent does not appear reasonable for the unit because the recovery period will be too long. Assuming no other expenses, Sean will break even after 15.6 years. The recovery period for the Lunsford Street Duplex is about 12.8 years, while the Hancock Street Duplex will recover costs in 11.4 years. This comparison underscores a need for higher rent to shorten the payback period.
Question 6
Internal Rate of Return (IRR) = R1 + ((NPV1 × (R2 – R1)) / (NPV1 – NPV2))
Future value= Present value of investment × (1 + discount rate) ^Number of periods
185000 × (1+ 0.03) ^ 20= $334130
3+ {(334130 × (5-3)) / (334130- 185000)}
(334130 × 2) / (149130) = 4.5+ 3= 7.5%
The IRR is sensitive to deviations in the assumptions that Sean has made. A decrease in rental income or operating expenses would reduce the IRR. Similarly, a spike in rental payments would lead to an increase in the IRR.
Sean’s actual results are consistent with these assumptions because he will gain from the investment. Annual cash flows will cover expenses and leave a significant amount for him to enjoy profit.
Question 7
Sean’s IRR for the Green duplex is likely to be lower than that of the other investments because of its high cost of construction and relatively low rent payments. Indeed, the rental amount is a major uncertainty for this project, as noted in the case study. While Sean estimates that $ 800 would justify the initial cost, there is no guarantee that tenants are willing to pay this amount. The desired $ 1,000 is even more ambitious, and Sean is doubtful that he can get this amount. Another uncertainty is the cost savings expected from the duplex. Sean expects lower maintenance and utilities costs due to the use of green technologies. However, anticipated cost savings might not be adequate to enhance the IRR. Additionally, trends in real estate might reduce the building’s attractiveness, lowering returns further.
Question 8
Sean should incorporate only some aspects of sustainability into the project to ensure it remains economically viable. This will enable him to balance between environmental conservation and financial returns. At the moment, the proposed complex will require more years to recover initial investment than the other projects. Additionally, the uncertainties associated with going green outweigh the estimated benefits, suggesting the project might be unviable in the long run. Some of the changes Sean can consider are installing a single gas boiler to serve both units, sharing the water and sewer connection between the two units, reducing the unit’s area, and switching from gas to electric boilers. These changes have a limited impact on the project’s greenness but will result in notable cost savings.
References
Cathcart, J., Henn, M., Hopkins, G. & Schantz, M. (2020). Unlocking hidden value in class B/C office buildings: Best practices for pursuing low-cost, high-impact energy efficiency and green leasing strategies
Lawrence, J. J. (2009). The green duplex.
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